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Optimal Dynamic Taxation with Indivisible Labour

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  • Basu, Parantap
  • Marsiliani, Laura
  • Renström, Thomas I
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    Abstract

    In this Paper, we take the field of optimal dynamic taxation further in two directions. Using a model with invisible labour, as in Hansen (1986) and Rogerson (1988), we first explore the short-run dynamics of the capital-income tax, particularly whether the tax, under the second-best programme, goes to zero in finite or infinite time. We derive two classes of preferences for which the optimal capital tax reaches zero in a finite time. Second, we ask what preference structures will leave labour untaxed at all times? An exponential preference structure is derived, for which labour is untaxed both in the short and long run.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4190.

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    Date of creation: Jan 2004
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    Handle: RePEc:cpr:ceprdp:4190

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    Keywords: dynamic taxation; indivisible labour; optimal taxation;

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    References

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    1. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
    2. Andrew Atkeson & V.V. Chari & Patrick J. Kehoe, 1999. "Taxing capital income: a bad idea," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-17.
    3. Casey B. Mulligan, 1999. "Microfoundations and Macro Implications of Indivisible Labor," NBER Working Papers 7116, National Bureau of Economic Research, Inc.
    4. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(3), pages 485-517, June.
    5. Reinhorn Leslie J., 2009. "Dynamic Optimal Taxation with Human Capital," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 9(1), pages 1-21, October.
    6. Jones, Larry E. & Manuelli, Rodolfo E. & Rossi, Peter E., 1997. "On the Optimal Taxation of Capital Income," Journal of Economic Theory, Elsevier, vol. 73(1), pages 93-117, March.
    7. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, Econometric Society, vol. 54(3), pages 607-22, May.
    8. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
    9. Jeremy Greenwood & Gregory W. Huffman, 1988. "On Modelling the Natural Rate of Unemployment with Indivisible Labour," Canadian Journal of Economics, Canadian Economics Association, vol. 21(3), pages 587-609, August.
    10. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
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    Cited by:
    1. Luca Spataro & Thomas I. Renstroem, 2010. "Optimal taxation, critical-level utilitarianism and economic growth," Working Papers 2010_06, Durham University Business School.

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